on Economics: A Kinder, Gentler Mondale
W. James Antle III
29 March 2004
fiscal policy solutions of choice in John Kerry’s party are raising taxes and
spreading the wealth with a generous hand.
Every major presidential
candidate must take part in that quadrennial ritual of introducing a plan
to solve what the chattering class considers to be the nation’s most pressing
economic problems. Adding to this challenge is that whatever the candidate
comes up with must roughly coincide with his party’s preferred fiscal nostrums.
While the problems change, the solutions don’t.
It is in this context that John Kerry trekked to Wayne State University in
Detroit for the grand unveiling of his economic program, with which he intends
to add 10 million new jobs, crack down on those “Benedict Arnold” CEOs who
are said to be “outsourcing America,” and force that wicked top 1 percent
to finally pay its fair share of taxes. The last points to the
difficulty inherent in the Democratic nominee achieving his first two objectives:
The fiscal policy solutions of choice in Kerry’s party are raising taxes
and spreading the wealth with a generous hand, two time-honored liberal panaceas
which alienate swing voters and are decidedly anti-growth.
But Kerry’s no dummy. While Howard Dean wanted to follow Walter Mondale
off the cliff by proposing an across-the-board tax increase, Massachusetts’
junior senator prefers following the example of Bill Clinton. His package
is a mishmash of tax cuts and tax increases, with the latter targeted against
those with incomes in excess of $200,000 a year, similar to what Clinton
campaigned on in 1992. He is bargaining that the voters won’t care
about raising someone else’s taxes – the old quip, “Don’t tax you and don’t
tax me, let’s tax the man behind the tree.”
Of course, Clinton’s middle-class tax cut ended up being dumped from his
1993 economic plan before being presented to Congress and the expansion of
the earned-income tax credit (which Clintonites often point to as evidence
that their man cut more people’s taxes than he raised) mainly increased the
number of people with no income-tax liability who received subsidies from
other taxpayers. Given the coming collision of real-income bracket
creep and the alternative minimum tax, one needn’t go very far out on a limb
to guess that a similar tax hike to tax cut ratio might be the result of
proposes a slight cut in the corporate tax rate from 35 percent to 33 ¼
percent. But this would be offset by the tax increase borne by small-business
owners and entrepreneurs in the top personal income tax bracket. Higher
taxes on dividends and capital gains would have a detrimental impact on investors
and the cost of capital.
Nor does the Kerry plan take into account the impact higher marginal tax
rates have on incentives to engage in income-generating activities.
Larry Kudlow, who I often disagree with but tends to be sensible on tax policy,
took note of this in his analysis for National Review Online: “The
Kerry proposal to roll back the Bush tax cuts would raise the after-tax cost
and reduce the post-tax investment return on capital by more than 54 ½
percent. Taking out the upper-bracket labor-income component — which is still
investment capital — the Kerry tax hike would reduce investment incentives
by nearly 47 percent and work-effort returns by more that 7 ½ percent.”
The Kerry plan’s penalties on U.S. companies with operations abroad would
probably do more to depress exports than halt outsourcing. He also
proposed tax credits to subsidize job creation. But past “human employment
tax credits” have been found wanting. In an economy that creates and
destroys more than 2 million jobs a month it is difficult to identify such
jobs and attribute them to the tax credit. Many companies end up being
rewarded for hiring workers they would have hired anyway. A study by
the Clinton Labor Department, for example, concluded that 92 percent of the
new jobs cited in claiming the tax credit would have been created anyway
and that the program cost three times more than it returned in employment
These tax credits also second-guess the market and distort companies’ decision-making
by arbitrarily rewarding them for filling certain jobs rather than making
the kinds of gains in output and productivity that create jobs and sustain
economic growth long-term.
Bruce Bartlett argued on his website, “In conclusion, it appears that Kerry
has chosen as his centerpiece jobs program two initiatives that will be ineffective
at best and positively harmful at worst. No serious economist thinks they
will create anywhere close to 10 million jobs, as Kerry claims.”
The idea that raising marginal tax rates, especially on the rich, will grow
the economy is based in part on perceptions of what worked during the Clinton
years. According to “Rubinomics,” a fiscal policy approach identified
with Clinton Treasury Secretary Robert Rubin, higher taxes can be a boon
for GDP if they reduce budget deficits, thus lowering interest rates.
But the connection between lower interest rates and the 1993 Clinton tax
increase is tenuous at best.
Other arguments in favor of Rubinomics depend on a selective reading of the
1990’s economic history. The rate of economic growth actually declined
immediately following the increase in marginal income tax rates and the one-third
increase in the top rate generated far less revenue than had been projected.
By the time economic growth really took off and the budget moved into surplus,
there had been an offsetting tax cut that slashed the capital gains tax rate
from 28 percent to 20 percent and government-limiting measures ranging from
welfare reform to reductions in nondefense discretionary spending.
The best that can be said for the decision to raise the top marginal income
tax rate to 39.6 percent under Clinton was that it neither prevented significant
growth later in the decade nor fulfilled the most hysterical Republican predictions
of economic disaster. It did, after all, still leave Ronald Reagan’s
tax cuts substantially intact. The same is likely to be the best possible
result if Kerry’s proposal to return the top tax rate to 39.6 percent were
Bush would be in a much better position to challenge Kerry on fiscal policy
if it weren’t for all the spending, borrowing and monetary pump-priming he
has supported during his administration. Some of the GOP’s standard-issue
economic nostrums aren’t faring any better as solutions to today’s problems;
in numerous other cases, the White House and congressional Republicans aren’t
living up to their free-market, small-government rhetoric nearly enough.
None of this changes the fact that Kerry’s idea of stimulating economic growth
and creating new jobs is to offer a grab-bag of warmed-over proposals culminating
in a net tax increase. Clinton may have taught the Democrats to use
rhetoric more soothing to taxpayers and businesses than Mondale, but on substance
it is evident that the party’s comprehension of markets, growth and wealth
creation has progressed little in the last 20 years.
W. James Antle III is a primary columnist for Intellectual Conservative.com. He works as an assistant editor of The American Conservative magazine and is also a senior editor of EnterStageRight.com.
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